effective occupation of taxation fields in québec

Commission on Fiscal Imbalance

Commissionsur le déséquilibre fiscal

Background

Paperfor public

consultation

Effective Occupation

of Taxation Fields

in Québec

COMMISSION ON FISCAL IMBALANCE

EFFECTIVE OCCUPATION OFTAXATION FIELDS

IN QUÉBEC

BACKGROUND PAPER FOR PUBLICCONSULTATION

ISBN: 2-550-37834-2Legal depositBibliothèque nationale du Québec, 2001

i

EXECUTIVE SUMMARY

This document examines the breakdown of the revenue collected inQuébec by public administrations in 2001-2002, between the federalgovernment, the Québec government, local administrations and certainparagovernmental agencies. More specifically, it summarizes the taxstructure (base, rates, etc.) of the various public administrations in eachtaxation field, describes the resulting effective occupation of the taxationfields and discusses the impact of the effective sharing of the fields on thegrowth of government revenue.

On the basis of this analysis, the following observations can be made:

� The estimated revenue of public administrations from all sources inQuébec will be close to $94 billion in 2001-2002.

� Of that amount, the federal government and the Québec government willeach collect approximately $39 billion, that is, a share slightly above 41%of the total amount. The revenue of local administrations andparagovernmental agencies will total nearly $16 billion, or a little more than17% of the total amount.

� With regard to personal income tax, the federal government occupies apreponderant share (57.9%) of this important field, which accounts foralmost one-third of the revenue of public administrations.

� The federal presence greatly exceeds that of Québec in the corporationincome tax field (60.9%). However, it is below that of Québec in the payrolltax field (24.5%) and in the taxes and duties on goods and services field(44.6%).

� The Québec government collects a preponderant share (77.2%) of theother sources of revenue (profits of government companies, rate-settingrevenue, royalties, etc.). This preponderance is largely explained by thegovernment’s major presence in the natural resource sector (e.g., Hydro-Québec profits) and the lottery sector, and by the profits of the Société desalcools du Québec.

This analysis also reveals that the growth potential of the Québecgovernment’s own-source revenue is lower than that of the federalgovernment, primarily because the latter’s share of the personal incometax field, the field with the strongest growth, is nearly 60%.

iii

TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................ I

INTRODUCTION ....................................................................................... 1

CHAPTER 1 – REVENUE OF PUBLIC ADMINISTRATIONSIN QUÉBEC ..................................................................... 3

Breakdown of the total revenue of public administrations ..................... 3Breakdown of the total revenue of public administrations by taxationfield ...................................................................................................... 4

CHAPTER 2 – CHARACTERISTICS OF THE TAXATION SYSTEMS...... 7Personal income tax and income tax of non-residents ......................... 7

Personal income tax....................................................................... 7Income tax payable by non-residents ............................................. 8

Corporate taxes ................................................................................... 8Corporate income tax ..................................................................... 9Tax on capital payable by corporations ........................................ 10Corporate tax credits .................................................................... 10

Taxes and duties on goods and services ........................................... 10General sales taxes...................................................................... 11Fuel .............................................................................................. 11Source: Commission on Fiscal Imbalance. ................................... 12Tobacco ....................................................................................... 12Alcoholic beverages ..................................................................... 12Customs duties ............................................................................ 13

Payroll taxes ...................................................................................... 13Employment insurance................................................................. 13Health services fund..................................................................... 14Commission de la santé et de la sécurité du travail ...................... 14Régie des rentes du Québec........................................................ 14Commission des normes du travail............................................... 14

Real estate taxes and other own-source revenue of localadministrations................................................................................... 15

CHAPTER 3 – EFFECTIVE OCCUPATION OF TAXATION FIELDS...... 17Personal income tax........................................................................... 17Corporate income tax......................................................................... 19Taxes and duties on goods and services ........................................... 20


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Payroll taxes ...................................................................................... 21Real estate taxes and other own-source revenue of localadministrations................................................................................... 22Other revenue of the Québec government and federal government ... 23Overall results .................................................................................... 24

CHAPTER 4 – REVENUE GROWTH: DYNAMICS AND POTENTIAL.... 27Growth dynamic ................................................................................. 28Changes to the taxation system ......................................................... 30

CONCLUSION ...................................................................................... 33

APPENDIX 1 – TAXATION POWERS: LEGAL PROVISIONS................ 35

APPENDIX 2 – THE SHARING OF TAXATION FIELDS: HISTORICALOVERVIEW ................................................................... 39

APPENDIX 3 – METHODOLOGY ........................................................... 43

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LIST OF TABLES

TABLE 1 – Personal income tax – income tax structure in 2001... 8

TABLE 2 – Corporation income tax effective tax rates as atJanuary 1, 2001 .......................................................... 9

TABLE 3 – Taxation of fuel ......................................................... 12

TABLE 4 – Taxation of tobacco – marketed format1 ................... 12

TABLE 5 – Taxation of alcoholic beverages................................ 13

TABLE 6 – Effective occupation of taxation fields in Québec, 2001-2002................................................................. 24

TABLE 7 – Effective occupation of taxation fields in Québec, 2001-2002................................................................. 25

TABLE 8 – Potential growth of federal government and Québec government revenue1................................................ 30

TABLE 9 – List of income tax abatements granted toall provinces .............................................................. 41

TABLE 10 – List of special Québec abatements ........................... 42

vii

LIST OF CHARTS

CHART 1 – Revenue of public administrations in Québec byorder of government................................................... 4

CHART 2 – Breakdown of the revenue of public administrationsby taxation field .......................................................... 5

CHART 3 – Effective occupation of the personal income taxfield .......................................................................... 18

CHART 4 – Effective occupation of the corporate income taxfield ......................................................................... 19

CHART 5 – Effective occupation of the taxes and dutieson goods and services field ..................................... 20

CHART 6 – Effective occupation of the payroll tax field .............. 21

CHART 7 – Effective occupation of the local administrationreal estate tax own-source....................................... 22

CHART 8 – Effective occupation of the public administrationother revenue field ................................................... 23

CHART 9 – Sources of Québec government and federalgovernment revenue in Québec............................... 27

CHART 10 – Growth in the main tax bases and in personal incometax, keeping a constant structure, 1981-2001 .......... 29

1

INTRODUCTION

This document presents the effective occupation of taxation fields in Québecfor 2001-2002 by the various orders of public administrations.

It first examines the overall distribution of revenue collected in Québecbetween the federal government, the Québec government, localadministrations and certain paragovernmental agencies. This analysis is thenapplied to each of the principal taxation fields.

Contrary to other studies based primarily on the use of allocators from theProvincial Economic Accounts, this study takes a different approach in that ituses the same basic data to determine the revenue of both the Québecgovernment and the federal government. Indeed, the revenue derived by thefederal government from sources in Québec is obtained by applying thefederal tax structure to the tax base implicit in the Québec governmentrevenue forecast presented in the 2001-2002 Budget Speech. The result is amore representative portrayal of the effective occupation of the varioustaxation fields in Québec.

This document is divided into four chapters. Chapter 1 provides an overviewof the revenue of public administrations. Chapter 2 briefly describes thecharacteristics of their taxation systems in each field of taxation. Chapter 3deals with the resulting effective occupation of the taxation fields for fiscalyear 2001-2002. Chapter 4 discusses the impact of the effective sharing ofthe taxation fields on the growth of government revenue. Lastly, appendicesat the end of the document recapitulate the legal provisions underpinning thetaxation powers of the governments, provide background information on theevolution of tax sharing in Canada and summarize the methodology used.

The results of this study will contribute to the work of the Commission onFiscal Imbalance when it analyses the correspondence between the taxationresources of the various orders of government and the responsibilities thathave been devolved to them.

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Chapter

1REVENUE OF PUBLIC ADMINISTRATIONS INQUÉBEC

Within the limits of the powers devolved to them, governments use the varioustaxation fields to finance public services. They start out by establishing a taxbase, that is, the taxable elements specific to each taxation field, and thendetermine the related tax rates. Specific provisions can be added onto the basicsystem in order to favour certain categories of taxpayers or certain types ofincome, consumption or economic behaviour.

Breakdown of the total revenue of public administrations

Application of the tax structures will create an estimated $93.7 billion in revenuefor public administrations as a whole in Québec in 2001-2002.1 Of that amount,38.5% will go to the federal government, 44.4% to the Québec government,9.6% to local administrations and 7.5% to paragovernmental agencies.

However, since it deducts the value of the special Québec abatement2 from itscontribution to social programs, the federal government in fact effectivelycontrols 41.6% of the total tax base, while the Québec government’s share is41.3%.

1 The statistical context is that of the Québec Public Accounts. Québec government revenue is

essentially that forecast in the 2001-2002 Budget Speech. Federal government revenue is calculated onan equivalent basis, using the tax bases. The revenue of local administrations and certainparagovernmental agencies occupying the same taxation fields as the Québec or federal government hasbeen added to federal and Québec revenue. The results presented here do not include the changes to thetaxation system announced after the 2001-2002 Budget Speech.

Sources: ministère des Finances du Québec, 2001-2002 Budget Speech; calculations based on theEconomic Statement and Budget Update of October 18, 2000, Department of Finance Canada; ministèredes Affaires municipales et de la Métropole, Prévisions budgétaires 2000, indexed for 2001; ministère del’Éducation.

2 The treatment of the special Québec abatement is discussed in greater detail in Chapter 3.


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CHART 1REVENUE OF PUBLIC ADMINISTRATIONS IN QUÉBEC

BY ORDER OF GOVERNMENTTOTAL: $93 718 M

Québec government :

41.3%($41 652 M)

Local sector : 9.6%

($8 965 M)

Paragovernmental agencies : 7.5%

($6 996 M)

Federal government :

41.6%($36 027 M)

1 The value of the 16.5% special personal income tax abatement was deducted from the revenue of the Québecgovernment and added to that of the federal government.

Source: Commission on Fiscal Imbalance.

Breakdown of the total revenue of public administrations bytaxation field

Personal income tax and the income tax payable by non-residents constitutethe principal source of funding of public administrations, accounting for 33.4%($31.3 billion) of their revenue.

Taxes and duties on goods and services and payroll taxes follow in secondand third place, accounting for 19.3% ($18.1 billion) and 18.5% ($17.3 billion)of revenue respectively.

Corporate income tax represents 11.9% ($11.2 billion) of the total amount,while local revenue represents 9.5% ($8.9 billion).

Lastly, the other sources of revenue of the Québec and federal governmentsaccount for 7.4% ($6.9 billion) of total revenue.

Revenue of public administrations in Québec

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CHART 2BREAKDOWN OF THE REVENUE OF PUBLIC ADMINISTRATIONS, BY TAXATION FIELD

TOTAL: $93 718 M(in millions of dollars)

31 321

18 099 17 308

11 1778 920

6 893

Personalincome

tax/income taxo f non-

residents

Taxes/duties ongoods andservices

Payro ll taxes Corporateincome tax

Real estatetaxes/other

local revenue

Other revenue


7

Chapter

2CHARACTERISTICS OF THE TAXATIONSYSTEMS

This chapter takes a look at each of the main types of income tax and othertaxes individually, by presenting the main characteristics of the taxationsystem instituted by the various orders of government.

Personal income tax and income tax of non-residents

Personal income tax is a taxation field occupied simultaneously by the federalgovernment and the provinces, whereas income tax payable by non-residentson investment income from Canadian sources is under the exclusivejurisdiction of the federal government.

Personal income tax

In general, taxable income (the tax base) for the purposes of Québec andfederal personal income tax is determined in a similar manner, with theexception of a few deductions specific to the Québec taxation system (forexample, the QSSP deduction).

Personal income tax is collected by the Québec government according tothree rates— 17%, 21.25% and 24.5%3—for the 2001 taxation year. Certaintax breaks take the form of non-refundable tax credits at a conversion rate of20.75%.4 In 2002, the three income tax rates will be 16%, 20% and 24%,whereas the rate for converting recognized amounts into non-refundable taxcredits will be adjusted to 20%.

The Québec government also grants a tax reduction for families, as well asrefundable tax credits for various expenses, including child-care expenses,real estate tax, sales tax and the cost of housing of a parent.

The federal government collects income tax according to four rates, namely,16%, 22%, 26% and 29% of taxable income. The amounts granted as taxrelief to individuals are converted into non-refundable tax credits at a rate of16%. Contrary to the Québec government, the federal government does notgrant an amount for persons living alone or for dependent children.

3 A new Québec tax table in effect as of July 2001 applies to the last six months of the

taxation year. The rates presented are those applicable for the year as a whole.4 Examples include the basic personal exemption, the amount for a spouse and the new

flat amount under the simplified tax system.


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Moreover, a special abatement5 of 16.5% of basic federal income tax isgranted to Québec residents. The offer of a federal abatement was extendedto all of the provinces in 1964; only the Québec government took the federalgovernment up on its offer.

However, the federal tax table has not been adjusted to take into account theabatement. Thus, Québec taxpayers calculate the total amount of federalincome tax payable, just like their counterparts in the other provinces, thendeduct the value of the special abatement from the amount of their incometax otherwise payable. Overall, their tax burden is not lighter than that ofother Canadian taxpayers, given that, in principle, Québec income tax isincreased accordingly.

TABLE 1PERSONAL INCOME TAX

INCOME TAX STRUCTURE IN 2001Québec Federal

Tax rate per taxableincome bracket

0 – $26 000 $26 000 – $52 000

$52 000 and over

17%21.25%24.5%

0 – $30 754 $30 754 – $61 509$61 509 – $100 000$100 000 and over

16%22%26%29%

Conversion rate fornon-refundable taxcredits

20.75% 16%

Special Québecabatement — 16.5%

Income tax payable by non-residents

Only the federal government collects income tax on the investment income ofnon-residents. It does so by withholding tax from interest, dividends, rent,royalties and other property income paid to non-residents. The federalgovernment derives an estimated $508 million in Québec from this taxsource.

Corporate taxes

The corporate income tax system set up by the federal and Québecgovernments includes two main components—corporate income tax and taxon capital—aside from payroll taxes.6

5 An abatement is a percentage of personal income tax that the federal government ceases to collect.

6 For the purposes of this document, the contribution to the health services fund is included with payrolltaxes.

Characteristics of the taxation systems

9

Corporate income tax

The calculation of taxable income, for the purposes of federal and Québeccorporate income tax, is generally the same. Without going into detail, thetaxable income of corporations corresponds to their pre-tax accountingincome (plus capital gains), less any dividends, capital losses and lossescarried over. It should be noted that capital cost allowance rules for incometax purposes are different from those for accounting purposes. To encourageinvestment in certain cutting-edge equipment, these rules sometimes allowfor accelerated depreciation of certain types of property.

In Québec, the tax rate is 8.9% on active income and 16.25% on investmentincome.

The federal taxation system provides for a basic rate of 27%.7 Active incomeeligible for the small business deduction (SBD) is generally taxed at 12%,while other income derived from manufacturing and processing activities istaxed at 21%. However, due to a surtax, these rates are effectively 13.12%,22.12 % and 28.12%. An additional income tax of 6.67% is levied oninvestment income; however, it is reimbursed in full when dividends are paid.

TABLE 2CORPORATE INCOME TAX

EFFECTIVE TAX RATES AS OF JANUARY 1, 2001(as a percentage)

Québec Federal1

Income eligible for the SBD 8.9 13.12

Other active income

� Manufacturing and processing (otherthan income eligible for the SBD)

8.9 22.12

� Other income 8.9 28.12

Investment income 16.25 28.122

1 Effective rate respecting income collected in a province, including the 4% surtax, which appliesbefore the SBD or the deductions for manufacturing and processing activities.

2 Excluding additional income tax, since it is reimbursed when dividends are paid.

7 The basic federal tax rate will drop to 25% on January 1, 2002, 23% on January 1, 2003 and 21% on

January 1, 2004.


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Tax on capital payable by corporations

In general, the Québec tax on capital base includes shareholders’ equity,long-term liabilities and surpluses. The federal base covers essentially thesame elements.

The Québec rate for most corporations is 0.64% of paid-up capital. Forfinancial institutions, whose paid-up capital is calculated differently, the rate is1.28%. Insurance companies pay tax on capital based on their premiums.The rate is 2% in the case of premiums relating to life insurance, healthinsurance or physical integrity. A 3% rate is payable on all other types ofinsurance.

The federal tax rate is 0.225%, but the first $10 million of paid-up capital isexempt. Moreover, the surtax on corporate income is fully deductible from thetax on capital.

The federal government also specifically taxes the capital of financialinstitutions. However, this tax can be reduced in full from their income taxpayable. Québec introduced a similar measure for life insurance companies,that is, a compensatory contribution of 1.25% of capital, which can bereduced in full from their income tax payable.

Corporate tax credits

Several tax credits are granted to corporations under both the federal andQuébec taxation systems. In Québec, these credits are generally refundableand are granted, for example, to corporations that carry out R&D, realizeQuébec film productions or operate in sectors of the new economy. Creditsfor R&D and Canadian film productions are also available under the federaltaxation system.

Taxes and duties on goods and services

Taxes and duties on goods and services include, in particular, general salestaxes and taxes and duties on fuel, tobacco and alcoholic beverages, as wellas customs duties. Although the persons subject to these taxes and dutiesmay differ under the Québec and federal taxation systems, the tax bases aregenerally similar. However, only the federal government can levy customsduties.


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General sales taxes

The Québec sales tax (QST) base is practically identical to that of the federalgoods and services tax (GST). As a general rule, the two taxes apply to non-exempt transactions of goods and services in Québec. However, the GSTpaid by companies on their inputs is fully reimbursable, while the QST paidon inputs is almost fully reimbursable.

Specifically, the Québec government does not grant large companies a fullrefund of the QST paid on the following inputs: road vehicles weighing lessthan 3 000 kg and the gas used to operate them; most telecommunicationsservices, energy (other than that used to produce movable property intendedfor sale); and meals and entertainment, which are 50%-deductible in thecalculation of income.

The QST rate is 7.5%, compared to 7% for the GST; however, it should bepointed out that the GST is included in the QST base, resulting in an effectiverate of 8.025%. Moreover, contrary to the federal government, the Québecgovernment charges QST on sales of used road vehicles betweenindividuals.

Certain products are subject to a specific tax in addition to the QST (fuel andalcoholic beverages) and the GST (fuel, tobacco8 and alcoholic beverages).

Fuel

The Québec government levies a specific tax on fuel, which varies with thetype of fuel product and the region in which the fuel is acquired. The fuel taxis generally 15.2 cents per litre of gasoline and 16.2 cents per litre of fuel oilintended for diesel engines. In the Montréal area, gasoline is subject to anadditional tax of 1.5 cents per litre, in order to fund the Agence métropolitainede transport. The specific tax is reduced to 3 cents per litre on gasoline foraircraft engines and on fuel oil for locomotive engines. Moreover, the fuel taxis reduced on gasoline and fuel oil in the so-called peripheral and specifiedregions, and on gasoline in the areas referred to as border regions.

The federal government applies an excise tax of 10 cents per litre of gasolineand 4 cents per litre of fuel oil.

8 The value of the Québec sales tax that was levied on tobacco products until June 1998 has since

been incorporated into the specific tax.


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TABLE 3TAXATION OF FUEL(in cents per litre)

Québec Federal

Gasoline

� Regular rate� Territory of the Agence métropolitaine de

transport (Montréal area)

15.2

16.7

10.0

10.0

Fuel oil 16.2 4.0

Gasoline for aircraft engines 3.0 10.0

Fuel oil for locomotive engines 3.0 4.0


Tobacco

The tax base with respect to the taxation of tobacco is the same for theQuébec government as for the federal government. Every month, the Québecgovernment pays a portion of the specific tax collected into the SpecialOlympic Fund, in order to finance the debt of the Régie des installationsolympiques.

TABLE 4TAXATION OF TOBACCO – MARKETED FORMAT1

Unit Québectax

Federal excise taxand duty

Cigarettes $/200 cigarettes 8.60 8.35Loose tobacco $/200 grams 4.30 5.80Leaf tobacco $/200 grams 2.15 0.31Pre-rolled sticks $/200 sticks2 6.98 6.60

1 Before the increases announced on April 5, 2001.2 Contain 130 grams or more of tobacco.Source: Commission on Fiscal Imbalance.

Alcoholic beverages

In Québec, taxation of alcoholic beverages is determined on the basis of theplace where the beverages are consumed. Alcoholic beverages forconsumption in an establishment are subject to a volume-based specific dutyand to an ad valorem duty, while those sold for consumption elsewhere thanin an establishment are subject to a volume-based specific tax. In addition,the specific tax and duty vary according to the type of product.


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The federal government collects an excise tax or duty on alcoholicbeverages; however, it is not determined on the basis of the place ofconsumption, but varies according to the product and alcohol content.

TABLE 5TAXATION OF ALCOHOLIC BEVERAGES

Place of consumption Beer Wine Spirits

In an establishment

Federal excise tax or duty1 (cents/litre) 27.99 51.22 442.64Québec specific duty2 (cents/litre) 40.00 89.00 89.00Québec ad valorem duty (%) 7.50 7.50 7.50Elsewhere than in an establishmentFederal excise tax or duty1 (cents/litre) 27.99 51.22 442.64Québec specific tax2 (cents/litre) 40.00 89.00 89.00

1 In the case of a per-volume alcohol content of 5% for beer, 11% for wine and 40% for spirits.2 The duty or tax is reduced on beer brewed in Québec by all brewers whose worldwide volume of beer sold

annually does not exceed 300 000 hectolitres. Thus, the specific tax or duty is 13 cents per litre on the first25 000 hectolitres of beer sold in a calendar year, and 27 cents per litre on the next 125 000 hectolitres. Areduction of the same type applies to wines made by small-scale producers.


Customs duties

Customs duties on imports are levied exclusively by the federal government,and are influenced by the international agreements of the World TradeOrganization and the North American Free Trade Agreement.

Payroll taxes

Payroll taxes in Québec include five taxes or quasi-taxes that are collected bythe Québec government, the federal government (employment insurance)and by three paragovernmental agencies, two of which (the Commission dela santé et de la sécurité du travail and the Commission des normes dutravail) are within the accounting jurisdiction of the Québec government.

Employment insurance

The employment insurance program is financed by employer and employeepremiums that the federal government includes in its budgetary revenue. Thepremium rate for employees and employers is currently $2.25 and $3.15,respectively, per $100 in insurable earnings. Maximum insurable earningsstand at $39 000 for 2001.


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Health services fund

Employers pay a contribution of 4.26% of their payroll to the health servicesfund, in the form of a withholding by the Québec government. This rate isprogressively reduced for employers with a payroll of less than $5 million, to aminimum of 2.7% for employers whose payroll is equal to or less than$1 million. In addition, a contribution is collected directly from individuals, ontheir income other than employment income. The contribution rate forindividuals is 1% when the income subject to the contribution exceeds$11 000 and is equal to or less than $40 000, for a maximum contribution of$150. In the case of income over $40 000, a 1% supplement is added to the$150 contribution, for a maximum total contribution of $1 0009—the amountpayable when the income subject to the contribution is equal to or greaterthan $125 000.

Commission de la santé et de la sécurité du travail

The Act respecting industrial accidents and occupational diseases providesfor services relating to compensation, medical assistance or rehabilitation forworkers who are the victim of an industrial accident or an occupationaldisease.

Under the Act, the Commission de la santé et de la sécurité du travail(CSST) establishes and collects the employer contributions required tofinance the services provided to victims of industrial accidents. Thecontribution rate varies with the risk associated with the employer’s economicactivity, the average rate being 1.9% on the first $51 500 of insurableearnings in 2001.

Régie des rentes du Québec

The Régie des rentes du Québec administers Québec’s universal benefitsplan. The plan, including its administrative costs, is financed primarily byemployer and employee contributions. The combined contribution rate for2001 is 8.6% and applies to maximum insurable earnings of $34 800.

Commission des normes du travail

The principal mandate of the Commission des normes du travail (CNT)consists in overseeing the implementation and application of labourstandards. The CNT’s activities are funded by employers, through a 0.08%withholding from the total remuneration subject to contribution paid during theyear. The maximum remuneration subject to contribution in 2001 is $51 500.

9 However, a tax credit of 20.75% can be claimed with respect to this contribution, thereby reducing the

maximum amount of the contribution to $792.50.


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Real estate taxes and other own-source revenue of localadministrations

The tax revenue of municipalities10 consists of the general real estate tax,sector-based real estate taxes, rates paid for municipal services, thebusiness tax and the tax and surtax on non-residential buildings. SinceJanuary 1, 2001, Québec municipalities have been authorized to apply ataxation system enabling them to establish up to five different real estate taxrates for the following categories of buildings: residential buildings in general,buildings with six or more dwellings, non-residential buildings in general,industrial buildings and serviced vacant lots.

Sales of goods and services, duties levied on real estate transfers and finesaccount for the other own-source revenue of municipalities and othermunicipal administrations, along with the special tax applicable to fuelpurchases in the Montréal area.

The tax revenue of school boards11 is derived exclusively from the school taxlevied on buildings. The school tax rate is the same across Québec, andcannot exceed $0.35 for every $100 of a building’s municipal evaluation.

10 Local municipalities, urban communities, regional county municipalities, intermunicipal boards, public

transport bodies and school boards.

11 For the purposes of this document, the own-source revenue of school boards, other than the schooltax, have not been taken into account.

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Chapter

3EFFECTIVE OCCUPATION OF TAXATIONFIELDS

This chapter presents the effective occupation of taxation fields, taking intoaccount the taxation systems instituted by each of the public administrations.

Personal income tax

Personal income tax is the biggest source of revenue for publicadministrations in Québec ($30.8 billion). In 2001-2002, the Québecgovernment will collect 51.6% of the revenue of this source while the Federalgovernment will collect 48.4%.

However, even if Québec collects a larger share of personal income tax, thefederal government nonetheless comes out ahead because of how thespecial Québec abatement works.

Although, thanks to this transfer of tax points, the Québec governmentoccupies a larger share of the personal income tax field and therebyincreases its fiscal flexibility, it derives no budgetary benefit from the transfer.


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This is because the federal government reduces the amount of its transfers tofund social programs in Québec by an amount equivalent to this specialabatement. The abatement therefore results in no net cost to the federalgovernment. In the other provinces, this revenue is explicitly included infederal income tax. Accordingly, the special Québec abatement can beassimilated with federal income tax, in terms of the effective occupation oftaxation fields.

Chart 3 below, which combines the special Québec abatement with federalincome tax, shows that the federal government receives 57.9% of Québecpersonal income tax. The balance—42.1%—constitutes the Québecgovernment’s share.

CHART 3EFFECTIVE OCCUPATION OF THE PERSONAL INCOME TAX FIELD

TOTAL: $30 813 M

Personal income tax:

42.1%($12 982 M)

Personal income tax:

48.4%($14 911 M)

Special abatement:

9.5% ($2 920 M)

Québec government 42.1% ($12 982 M)

Federal government 57.9% ($17 831 M)


Effective occupation of taxation fields

19


The federal government occupies a larger share of the corporate income taxand tax on capital field than the Québec government, collecting 60.9% of thisrevenue, compared with 39.1% for the Québec government.

This gap is essentially attributable to the difference between the corporateincome tax rates used by the federal and Québec governments. The federalrates are higher than those of Québec; as a result, the corporate income taxcollected by Québec represents only 18.9% of the total revenue generated bythis field, whereas the federal government takes in 59.7% of the total amount.

It should be noted that the Québec government’s more extensive use of taxon capital,12 narrows somewhat the gap opened up by the federalgovernment’s higher corporate income tax rates.

CHART 4EFFECTIVE OCCUPATION OF THE CORPORATE INCOME TAX FIELD

TOTAL: $11 177 M

Tax on capital :1.2% ($135 M)

Income tax: 18.8%

($2 114 M)

Income tax: 59.7%

($6 668 M)Tax on capital:

20.2%($2 260 M)


Federal government 60.9% ($6 803 .


12 Includes the tax on telecommunications, gas and electricity.


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The Québec government’s share (55.1%) of the taxes and duties on goodsand services field is greater than the federal government’s (44.6%), primarilybecause the Québec government occupies a larger portion of the generalsales tax field. The QST represents 41.1% of the total revenue from this field,whereas the GST represents only 32.1%.

This gap is due primarily to the fact that the QST rate is higher, its base isbroader (e.g., the tax on insurance premiums and on used vehicles) andQuébec does not grant large companies a full refund of the QST paid oncertain inputs.

CHART 5EFFECTIVE OCCUPATION OF THE TAXES AND DUTIES

ON GOODS AND SERVICES FIELDTOTAL: $18 099 M(1)

Sales tax 41.1% ($7 430 M)

Customs duties 2.4% ($434 M)

Alcoholic beverages: 1.6%

($283 M)Tobacco: 3.1%

($557 M)Fuel 55%

($1 004 M)

Sales tax 32.1% ($5 803 M)Alcoholic

beverages: 2.2% ($403 M)

Tobacco: 3.1% ($557 M)

Fuel 8.7%($1 582 M)


Federal government 44.6% ($8 080 M)

1 This is not the full amount, as the revenue derived by the Agence métropolitaine de transport from the 1.5cent tax on gasoline ($46 million) is included in the revenue of local administrations.


The federal government occupies 10.3% of this field through specificconsumption taxes (fuel, tobacco, alcoholic beverages) and 2.4% throughcustoms duties. For its part, Québec occupies 14% of the field throughspecific consumption taxes.


21

Taking into account the tax rates, specific taxes on alcoholic beveragescreate more revenue for Québec. The same is true with regard to the fuel tax,with the Québec government taking in 60.1% of the revenue from this source.The federal presence is equal to that of Québec with regard to tobacco.

Payroll taxes

Given the contribution rates applied, the Régie des rentes du Québecoccupies 40.4% of the payroll tax field. Québec contributions to the healthservices fund account for 25.6% of this field, while the share of theemployment insurance program is 24.5%. The paragovernmental agencies(CSST and CNT) included in the accounting jurisdiction of the Québecgovernment take in 9.5% of the revenue from this field.

CHART 6EFFECTIVE OCCUPATION OF THE PAYROLL TAX FIELD

TOTAL: $17 308 M

Employment insurance: 24.5%

($4 232 M)

Régie des rentes du Québe: 40.4%

($6 996 M)

Commission des normes du travail:

0.9% ($46 M)

CSST: 8.2%($1 598 M)

Health services fund: 25.6%($4 436 M)

Québec government: 35.1% ($6 080 M)

Federal government: 24.5% ($4 232 M)

Régie des rentes du Québec: 40.4% ($6 996 M)



22

Real estate taxes and other own-source revenue of localadministrations

The own-source revenue of municipal administrations totals $8.0 billion, or88.9% of local own-source revenue. School boards collect $993 million in realestate taxes, which represents 11.1% of their revenue.

CHART 7EFFECTIVE OCCUPATION OF THE LOCAL ADMINISTRATION

REAL ESTATE TAX OWN-SOURCETOTAL: $8 966 M

School boards: 11.1% ($993 M)

Real estate taxes and other own-

sources revenue: 88.4% ($7 973 M)

Full tax: 0.5%($46 M)

Municipal administrations: 88.9% ($7 973 M)

School boards: 11.1% ($993 M)



23

Other revenue of the Québec government and federalgovernment

The Québec and federal governments derive their other revenue frommultiple sources, such as the following: rates paid for services (duties andpermits); interest and penalties claimed from individuals and companies ondebts owed to the government; sales of goods and services; confiscationsand the recovery of various amounts; fines; and profits of governmententerprises. Other sources include the duties on forest, mining and hydraulicresources collected solely by provincial governments, as well as revenuefrom government agencies13. For the federal government, they include therevenue of the Bank of Canada and of the exchange fund.14

The Québec government’s other revenue totals $5.3 billion, that is, 77.2% ofthe total amount generated by this field. Québec’s preponderance isexplained primarily by its major presence in the natual resource sector (e.g.,Hydro-Québec’s profits) and the lottery sector, as well as by the profits of theSociété des alcools du Québec.

CHART 8EFFECTIVE OCCUPATION OF THE PUBLIC ADMINISTRATION OTHER REVENUE FIELD

TOTAL: $6 893 M

Québec government:

77.2%($5 324 M)

Federal government:

22.8%($1 569 M)


13 However, the contribution on remuneration, for the purposes of the CSST and the CNT, is included

with payroll taxes.

14 The revenue of the Bank of Canada and the exchange fund is calculated using allocators from theProvincial Economic Accounts.


24

Overall results

Tables 6 and 7 give a detailed presentation of the effective occupation ofeach of the taxation fields examined. According to the tables, the total shareof the federal government and the Québec government in taxation fields inQuébec is about the same.

TABLE 6EFFECTIVE OCCUPATION OF TAXATION FIELDS

IN QUÉBEC, 2001-2002(in millions of dollars)

Yield

Federal Québec Local Agencies Total

Personal income tax� Effective yield 14 911 15 902 — — 30 813� Special Québec abatement 2 920 (2 920) — — —

17 831 12 982 — — 30 813Income tax of non-residents 508 — — — 508

Corporate income tax� Income tax 6 668 2 114 — — 8 782� Tax on capital 135 2 260 — — 2 395

6 803 4 374 — — 11 177Taxes and duties on goods andservices� General sales taxes 5 803 7 430 — — 13 233� Fuel 1 004 1 582 46 — 2 632� Tobacco 557 557 — — 1 114� Alcoholic beverages 283 403 — — 686� Customs duties 434 — — — 434

8 080 9 972 46 — 18 099Payroll taxes� Employment insurance 4 232 — — — 4 232� Health services fund — 4 436 — — 4 436� Régie des rentes du Québec — — — 6 996 6 996� Commission de la santé et de la

sécurité du travail — 1 598 — — 1 598� Commission des normes du travail — 46 — — 46

4 232 6 080 — 6 996 17 308Real estate taxes and other localown-source revenue� Municipal administrations — — 7 927 — 7 927� School boards — — 993 — 993

— — 8 920 — 8 920Other revenue 1 569 5 324 — — 6 893

Total revenue� Effective yield 36 104 41 652 8 966 6 996 93 718� Special Québec abatement 2 920 (2 920) — — —Total 39 024 38 732 8 966 6 996 93 718



25

TABLE 7EFFECTIVE OCCUPATION OF TAXATION FIELDS

IN QUÉBEC, 2001-2002(as a percentage of the total)

Yield

Federal Québec Local Agencies Total

Personal income tax� Effective yield 48.4 51.6 — — 100� Special Québec abatement 9.5 (9.5) — — —

57.9 42.1 — — 100Income tax of non-residents 100.0 — — — 100Corporate income tax� Income tax 77.5 24.1 — — 100� Tax on capital 5.6 94.4 — — 100

60.9 39.1 — — 100Taxes and duties on goods andservices� General sales taxes 43.9 56.1 — — 100� Fuel 38.2 60.1 1.7 — 100� Tobacco 50.0 50.0 — — 100� Alcoholic beverages 41.2 58.8 — — 100� Customs duties 100.0 — — — 100

44.6 55.1 0.3 — 100Payroll taxes� Employment insurance 100.0 — — — 100� Health services fund — 100.0 — — 100� Régie des rentes du Québec — — — 100.0 100� Commission de la santé et de la

sécurité du travail — 100.0 — — 100� Commission des normes du travail — 100.0 — — 100

24.5 35.1 — 40.4 100Real estate taxes and other localown-source revenue� Municipal administrations — — 100.0 — 100� School boards — — 100.0 — 100

— — 100.0 — 100Other revenue 22.8 77.2 — — 100

Total revenue� Effective yield 38.5 44.4 9.6 7.5 100� Special Québec abatement 3.1 (3.1) — — —Total 41.6 41.3 9.6 7.5 100

Source: Commission on Fiscal Imbalance.our

27

Chapter

4REVENUE GROWTH: DYNAMICS ANDPOTENTIAL

Analysis of the effective occupation of the taxation fields shows that theQuébec government and federal government are both present in most of thefields.

The extent to which they are present varies, however, as illustrated inChart 9, which shows the importance of each source of revenue for theQuébec government and the federal government. To analyse the effects ofthis breakdown on the revenue growth potential of each orders ofgovernment, two factors need to be taken into account: the intrinsic growth ofeach of the sources of revenue and the changes in the taxation system.

CHART 9SOURCES OF QUÉBEC GOVERNMENT AND FEDERAL

GOVERNMENT REVENUE IN QUÉBEC

Québec Government Federal Government

Tax and duties on

goods and services25.8%


11.3% Payroll taxes15.7%

Personal income tax

33.5%

Other revenue13.7% Payroll taxes

10.9%


17.4%

Other revenue

4.0%

Tax and duties on

goods and services20.7%


47.0%



28

Growth dynamic

Chart 10 shows that, keeping a constant structure,15 personal income tax hasgrown much more rapidly than the gross domestic product since the early1980s. This is due to the progressive nature of the taxation system. Contraryto the other sources of revenue, personal income tax is collected on the basisof a number of rates that increase with the level of taxable income.

In a non-indexed taxation system, a 1% increase in income subject topersonal income tax generates, on average, an increase in tax revenue of1.4%. In the case of an indexed system, this increase is 1.2%. Since thegrowth in income exceeds inflation, the progressiveness of the taxationsystem is preserved.

This leverage effect does not apply to the other sources of revenue, orapplies to them only marginally.

This is the case, in particular, with single-rate taxes such as corporate incometax and the general sales tax (although the federal government has multiplerates for corporate income tax). The increase in yield from these taxationfields more or less keeps pace with the increase in their tax base.

As shown in Chart 10, sales tax revenue is closely tied to general economicgrowth,16 while corporate income tax revenue is much more volatile, asindicated by the drop in the early 1990s.

Growth is also limited in the case of payroll tax revenue, notably becausemost taxation systems provide for caps on contribution rates.

15 Personal income tax collected from 1981 to 2001, according to the tax structure for 1995, so as to

exclude the impact of tax measures on the change in revenue.

16 Chart 10 shows the change in the sales tax and corporate income tax bases. However, in the case ofpersonal income tax, it shows the growth in yield keeping a constant structure, rather than tax basegrowth, in order to illustrate the effects of the progressiveness of the taxation system. In general, taxbase growth corresponds to the growth in GDP.

Revenue growth: dynamics and potential

29

CHART 10GROWTH IN THE MAIN TAX BASES AND IN PERSONAL INCOME TAX, KEEPING A

CONSTANT STRUCTURE, 1981-2001

0

100

200

300

400

500

600

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

1981

= 1

00Corporate profits before income taxPersonal income tax (constant structure)Gross domestic product at market pricesHousehold consumption excluding taxes(1)

1 Excluding food and rent.Source: Income and Expenditure Accounts Division, Statistics Canada.

F: ForecastSource: Commission on Fiscal Imbalance.

Growth is generally slower in the case of other sources of revenue, such asspecific taxes (on fuel, tobacco and alcoholic beverages), royalties on naturalresources, revenue relating to automotive vehicles and miscellaneousrevenue such as interest, fines and sales of goods and services. Thesetaxation fields depend on the volume of consumption, contrary to most otherfields, into which the effect of price increases is also incorporated.

Table 8 shows the growth, keeping a constant structure,17 in the revenue ofthe two orders of government. Federal government revenue grows morerapidly, primarily because the federal government occupies close to 60% ofthe personal income tax field—the field with the highest growth rate.

While the gap in the revenue growth rate of each order of government mayseem narrow (4.1% versus 3.7%), it shows that in five years the Québecgovernment would have $1 billion more in revenue if it had the same growthrate as the federal government.

17 For illustration purposes, the tax structure changes announced in recent budgets have not been taken

into account.

F


30

TABLE 8

POTENTIAL GROWTH OF FEDERAL GOVERNMENT AND QUÉBEC GOVERNMENTREVENUE1

(as a percentage)Federal Québec

Share ofrevenue

Growth rate Share ofrevenue

Growth rate

Personal income tax 45.7 4.8 33.5 4.8Income tax of non-residents 1.3 4.8 — —Corporate income tax� Income tax 17.1 4.0 5.5 4.0� Tax on capital 0.3 4.0 5.8 4.0

17.4 11.3Taxes and duties on goods andservices� General sales taxes 14.9 4.0 19.2 4.0� Fuel 2.6 1.9 4.1 1.9� Tobacco 1.4 1.9 1.5 1.9� Alcoholic beverages 0.7 1.9 1.0 1.9� Customs duties 1.1 — — —

20,7 25,8Payroll taxes� Employment insurance 10.9 3.6 — —� Health services fund — — 11,5 3,6� Commission de la santé et de la

sécurité du travail — — 4.1 3.6� Commission des normes du travail — — 0.1 3.6

10,9 15,7Other revenue 4.0 1.4 13.7 1.4Total revenue 100.0 4.1 100.0 3.7

1 Hypotheses: 4% GDP growth; 1.2 elasticity of personal income tax; specific tax growth tied to CPIgrowth (1.4%) and population growth (0.5 %); growth in employment insurance revenue tied to increase insalaries and wages (3.6 %).


Changes to the taxation system

The revenue derived by the governments from the taxation fields they occupydepends in large part on the effects of tax competition from neighbouringjurisdictions and other orders of government.

There are two types of tax competition:

� Horizontal competition occurs between governments on the same level.Changes to the taxation system of one government can attract anotherjuridiction’s taxpayers, capital and investments. To maintain itscompetitiveness, a government might decide to reduce its tax burdenmore than it should, thereby endangering public services.

Revenue growth: dynamics and potential

31

� Vertical competition occurs between different orders of government. Ifone order of government increases its tax rates, a reduction in the size ofthe tax base may result (e.g., decline in the consumption of a productfollowing a tax increase). Another order of government may then decideto raise its tax rates in order to maintain its budgetary revenue. Similarly,if an order of government reduces its rates, thereby vacating a portion ofthe taxation field, another order of government may decide to increase itsrates.

However, tax competition exerts pressure primarily with regard to provincialpersonal income tax, notably because certain provinces have announced amajor reduction in their tax burden. However, pressure can also be exertedwith regard to corporate income tax, given the high mobility of capital.

33

CONCLUSION

In choosing the extent of their occupation of the various taxation fields,governments must take into account legal, economic, budgetary andadministrative constraints, as well as the presence of other publicadministrations in the same tax space.

In this respect, this document shows the effective occupation of taxationfields in Québec in 2001-2002.

It indicates that the federal and Québec governments share the revenuecollected in Québec pretty much equally. However, the federal governmenttakes in amounts equivalent to occupying almost 60% of the personal incometax field—the only field whose growth is generally higher than that of nationalproduction. As a result, the federal government’s fiscal capacity has a highergrowth potential then that of the Québec government.

35

Appendix

1TAXATION POWERS: LEGAL PROVISIONS

The Constitution Act 186718 assigns the Parliament of Canada and theprovincial legislatures distinct, respective legislative powers with regard to taxcollection. As a result, the federal and provincial governments have theauthority to tax Canadian citizens and goods on their territory.

The areas of jurisdiction of Parliament and the provincial legislatures19

respecting taxation are provided for in sections 91 and 92 of the ConstitutionAct 1867. More specifically, subsections 91(3) and 92(2) define the generalframework in which they can make laws to organize the exercise of theirtaxation powers.

General taxation powers

Subsection 91(3) of the Constitution Act 1867 provides for the exclusivelegislative authority of the Parliament of Canada to make laws to raise moneyby any mode or system of taxation. Subsection 92(2) states that provinciallegislatures have exclusive legislative authority regarding direct taxationwithin their province in order to raise revenue for provincial purposes.

Thus, the Parliament of Canada has more extensive powers than theprovincial legislatures since they apply to any mode of taxation (direct orindirect), whereas the provinces’ powers are limited to governing directcontributions on their territory.

Executive powers are shared along the same lines as legislative authority; asa result, the boundary between the respective modes of taxation of thefederal government and the provincial governments stems implicitly fromthese two subsections.

While, under the provisions governing general taxation powers, provincialtaxes must always be direct in order to be valid under the Constitution, thefederal government can collect any tax, regardless of whether it is direct orindirect.

18 When the Constitution was repatriated in 1982, the British North America Act 1867 was renamed the

Constitution Act 1867.19 Local administrations and paragovernmental agencies do not have legislative powers under the

Constitution. Their taxation powers stem from laws passed by Parliament or the provincial legislatures.The revenue of local adminstrations and paragovernmental agencies is presented separately in thisdocument, due to its volume.


36

Under the current principles of Canadian constitutional law, a tax is direct if itis collected from the person who is meant to pay it. In short, a tax is said tobe direct if it is actually paid by the person who is subject to it.

For example, personal income tax and corporate income tax are direct taxes.The Québec sales tax (QST) is also a direct tax, as acknowledged by theSupreme Court of Canada in Reference re Quebec Sales Tax (June 23,1994).20

Conversely, taxes are considered indirect if they are collected from a personwith the expectation or intention that the person.

Specific taxation powers

Customs and excise duties

It is generally acknowledged that the federal legislation authorizing thelevying of customs and excise duties stems from subsections 91(2)(regulation of trade and commerce) and 91(3) of the Constitution Act 1867,and that these duties are classic examples of indirect taxes. Customs duties(tax on imports of goods) and excise duties (tax on the manufacture anddistribution of goods) may legitimately be expected to be paid by the enduser—the person who consumes the goods, that is, who purchases themfrom the importer or manufacturer.

Licences and permits

Not only does subsection 92(2) of the Constitution Act 1867 confer legislativeauthority over the collection of taxes on the provinces, in addition, subsection92(9) bestows on the provinces the legislative power to charge duties on theissuance of licences and permits.

Natural resources

On April 17, 1982, the Constitution Act 1867 was amended to acknowledge,notably, the legislative power of the provinces over indirect taxation of naturalresources.

Subsection 92A(4) of the Constitution Act 1867, incorporated by section 50 ofthe Constitution Act 1982, gives the provinces legislative power over thedirect or indirect taxation of non-renewable natural resources, forestryresources and the primary production therefrom, as well as over facilities forthe generation of electrical energy and the production therefrom. It should be

20 In this judgment, the Supreme Court of Canada effectively recognized that the general QST system,

with its input tax refund mechanism, creates a tax with a direct general effect, despite certainprovisions which, when considered separately, could, as an exception, give rise to an indirect tax.

Taxation powers : Legal provisions

37

noted that such taxation is possible even if the production in question issubject to export.

Municipal and school taxes

The federal legislative power to collect taxes cannot be delegated to theprovinces. However, the provinces can empower municipalities and schoolboards to collect taxes, pursuant to their jurisdiction over municipalitesprovided for in subsection 92(8) of the Constitution Act 1867. Under thisexclusive jurisdiction, the provinces authorize municipalities, through themaking of laws, to levy municipal taxes such as real estate taxes andbusiness taxes and to set the rates for various municipal services.

The taxation powers conferred on school boards by the provinces stem fromthe provinces’ exclusive jurisdiction over education provided for in section 93of the Constitution Act 1867.

Other duties imposed

Another way for the provinces to create revenue consists in imposing dutiesrespecting defined government programs. Duties imposed by a province forthe use of property it owns (mines, for instance) are one such example.

Since these duties do not constitute “taxes” within the meaning of subsection92(2) of the Constitution Act 1867, they need not be imposed directly.

39

Appendix

2THE SHARING OF TAXATION FIELDS:HISTORICAL OVERVIEW

There have been many changes to the sharing of taxation fields between thevarious orders of government in the past 50 years. During World War II, thefederal government monopolized the principal taxation fields. The provincessubsequently gained access to an increasingly larger share of the tax bases,due to the considerable increase in their education, health and incomesupport needs.

The first taxes levied

Personal income tax

The federal government brought in personal income tax in conjunction withWorld War I. Only British Columbia and Prince Edward Island had alreadybegun levying the tax. In Québec, further to the passage of a provincial law,the city of Montréal began levying personal income tax in 1935. The Québecgovernment followed suit in 1939.


From the outset of Confederation, the provinces have been confronted byever-increasing financial needs and have had to find new sources of revenue.In 1882, Québec was the first to levy a tax on corporations. The otherprovinces followed Québec’s lead one after the other. Corporate income taxwas introduced in 1932. The dividend tax and the tax on capital for financialcorporations were brought in 1939 and 1947 respectively.

Sales taxes

The federal government introduced its first general sales tax in 1920. Québecfollowed suit 20 years later. Given the increasing use of automobiles, theQuébec government also brought in a tax on gasoline the same year.Subsequently, a number of taxes were introduced by both orders ofgovernment, including the Québec tobacco tax (1940) and the federal tax onalcohol (1942).


40

World War II: federal government monopoly on direct taxes

During World War II, the nine provinces accepted the federal government’soffer to turn over their personal income tax, corporate income tax and estatetax to the federal government, in return for annual subsidies ascompensation. Initially, this tax rental agreement was to have beentemporary.

At the end of the war, the federal government did not return the directtaxation fields to the provinces; rather, it granted them certain collectionrights, while proposing to renew the tax rental agreement. Only Québec andOntario refused the federal proposal, preferring to retain full latitude inintroducing their own taxes.

Tax arrangements from 1952-1957 were not substantially different fromearlier ones. Ontario, however, decided to join the tax rental agreement forthe purposes of personal income tax and corporate income tax. Once again,Québec refused to be included in the agreement and, in 1954, brought in itsown personal income tax. The Québec rate corresponded to 15% of thefederal rate, whereas the federal government granted a provincial income taxabatement of only 5%. Further to Québec’s decision, the federal governmentraised the abatement for Québec taxpayers to 10%. In 1957, the federalabatement became 10% for all provinces and the abatement for corporateincome tax was raised from 7% to 9%.

Early 1960s: larger percentage of tax room taken over by theprovinces

In the early 1960s, the federal government used its spending power todevelop, with the other provinces, major shared-cost social programs, inparticular in the areas of health and education. During this period, tax-sharingarrangements were reviewed. The federal government increased its personalincome tax abatement, which eventually reached 24% of total income tax in1965. Additional abatement were granted with respect to post-secondaryeducation in 1967, that is, four tax points for personal income tax and one taxpoint for the taxable income of corporations.

The sharing of taxation fields : historical overview

41

TABLE 9LIST OF INCOME TAX ABATEMENTS GRANTED TO ALL PROVINCES

(as a percentage)

Personal income tax Taxable corporate income1953 5 71954 51 71955 51 71956 51 71957 10 91958 13 91959 13 91960 13 91961 16 91962 17 91963 18 91964 21 91965 24 91966 24 91967 28 101968 28 101969 28 101970 28 101971 28 10

1 An additional 5% abatement was granted to Québec to take into account the introduction of its owntaxation system.


As of 1972: no more sharing of personal income tax room

Until 1972, the principal taxation fields were shared between the two ordersof government, except in the case of Québec, which administers its owntaxation system. For example, the personal income tax structure was suchthat the result obtained by multiplying taxable income by the federal tax ratescorresponded to the combined federal and provincial income tax. To theextent that the provincial governments used tax rates that yielded more thanthe abatement granted to taxpayers by the federal government for provincialincome tax purposes, the excess income tax was considered a surtax.

As a result of the federal tax reform of 1972, the concept of tax sharing thathad underpinned federal-provincial tax relations was replaced with a newphilosophy whereby each of the two orders of government occupies thetaxation fields on a needs basis.


42

However, the federal government waived 4.357 personal income tax points inorder to free up the tax room used by the provinces to finance spending onpost-secondary instruction. In 1977, it raised the value of these tax points to14.9% and allowed one point for corporate income tax.

Special Québec abatements

Further to the federal-provincial conference on tax arrangements held inQuébec City in 1964, the federal government offered all of the provinces theoption of withdrawing from a series of shared-cost programs in return forfinancial compensation. Only Québec took the federal government up on itsoffer. In 1965, Québec obtained 20 basic federal tax (BFT) points, over andabove the three points obtained in 1964 for the youth allowance program.

The value of these abatements has been 16.5% of BFT since 1977,21 and isdeducted from federal transfer payments.

TABLE 10LIST OF SPECIAL QUÉBEC ABATEMENTS

(as a percentage)

1964 1965-1966 1967-1971 1972-1976 Since 1977

% of BFT 3 23 22 24 16.5Source: Commission on Fiscal Imbalance.

21 The variation in the value of points in 1972 and 1977 merely reflects a change in the calculation base

and is intended to represent the same value as before in millions of dollars.

43

Appendix

3METHODOLOGY

In this document, the data pertaining to Québec government revenue areessentially those forecast in the 2001-2002 Budget Speech. The revenuederived by the federal government from sources in Québec was generallycalculated implicitly, using the tax bases. The revenue of paragovernmentalagencies was obtained primarily from their financial statements and from a2001-2002 forecast.


Personal income tax

Federal personal income tax in Québec was obtained using an estimate ofthe income tax payable and the applicable credits. The Child Tax Benefit wasnot deducted from this amount, in order to reproduce the Québec structure,whereas the value of the GST credit was deducted.

Income tax of non-residents

Federal tax withheld in Québec from the interest, dividends, rent, royaltiesand other income paid to non-residents was calculated using the data in theProvincial Economic Accounts.


An estimate of federal tax bases in Québec was used to calculate federalcorporate income tax. Taxable federal corporate income was obtained bytracing the progression of the last available real figure on the basis of theevolution in taxable income implicit in the forecast of Québec governmentincome.

The yield of the other federal tax bases was estimated by indexing the lastknown yields using the most appropriate economic or tax indicator (forexample, paid-up capital in the case of tax on capital and corporate profits inthe case of the dividend tax).


44


GST and QST

The federal goods and services tax was estimated using Québec sales taxyields. The differences in the bases were in large part estimated using the taxexpenditure account and projected on the basis of the growth indicators forthe sectors concerned.

Fuel

In Québec, sales of gasoline and fuel oil (diesel engines) are the main taxbases subject to the Québec fuel tax and the federal excise tax on fuel.Federal government revenue was estimated by applying the excise tax to thevolumes of fuel sold in Québec.

Tobacco

Federal tobacco tax revenue in Québec was calculated using the implicitvolume method, which consists in dividing Québec tobacco revenue by thetax rates to determine the taxed volumes of tobacco sold in Québec. Theimplicit volumes thus obtained were then multiplied by the federal tax rates toobtain the federal revenue in Québec.

Alcoholic beverages

Québec revenue from the taxation of alcoholic beverages includes thespecific tax, the specific and ad valorem duties and the revenue fromretailers’ licences. It does not include the net profits of the Société des alcoolsdu Québec, which are included in “other income”, along with those of theother government enterprises.

The various rates in effect were applied to the volumes of beer, wine andspirits consumed in Québec to determine federal revenue derived from thetaxation of alcoholic beverages.

Customs duties

Customs duties are under exclusive federal jurisdiction. Federal revenue fromcustoms duties in Québec was estimated using the data in the ProvincialEconomic Accounts as an allocator.

Methodology

45

Payroll taxes

Employment insurance premiums in Québec were determined using per-province data on employee premiums. Contributions to the Régie des rentesdu Québec, the Commission de la santé et de la sécurité du travail and theCommission des normes du travail were estimated on the basis of thefinancial statements of the agencies concerned and a 2001-2002 forecast.

Real estate taxes

The data of municipal administrations were determined by indexing themunicipal budget forecasts for 2000, as compiled by the ministère desAffaires municipales et de la Métropole, by the 1.7% CPI rate. School boarddata (school taxes) were indexed by 0.85%,22 using the estimate of theministère de l’Éducation for 2000.

Other revenue

The other revenue of the Québec government includes duties and licences,the revenue of government enterprises and miscellaneous revenue. Theother revenue of the federal government also includes most non-tax revenue,such as the profits of the Bank of Canada, the exchange fund and theCanada Mortgage and Housing Corporation, interest income, rate-settingrevenue, etc. Allocators from the Provincial Economic Accounts were used tocalculate federal revenue in Québec.

22 These historical data show that such revenue evolves less rapidly than the CPI.

effective occupation of taxation fields in québec

Documents